Having a long-term plan for funding your children's education means considering the goal sooner rather than later if you hope to reach it. In other words, the best time to start thinking about how you'll pay for your kids to go to college is when they're babies, as opposed to when they're about to begin high school.
But if you set up your college savings accounts with the right kind of investments -- assets you can hold and add to for 20 years -- you could very well fund higher education for multiple children. And, with the right college savings plan -- more formally called a 529 plan -- setup, you could also potentially support their K-12 education.
Here are five exchange-traded funds (ETFs) you might want to consider using as the basis for the long-term investment goal of paying for a college education.
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1. Vanguard 500 Index Fund ETF
This fund provides a good starting point. The Vanguard S&P 500 Index Fund ETF (VOO -0.69%) tracks 500 of the largest companies (by market capitalization) traded on U.S. exchanges, and it has proved to be a strong investment over any 15-year period in U.S. history. While there's no guarantee the index will rise in any short- or medium-term period, investors in this ETF can be fairly confident that major benchmarks will rise over the decade or two that they will be saving for a child's post-secondary education. Investing in a fund tracking the S&P 500 is a good starting point for any college savings plan.
2. Vanguard Small-Cap Value Index Fund ETF
If you are looking to diversify the holdings in your college savings plan, the Vanguard Small-Cap Value ETF (VBR 0.14%) might warrant being part of an overall portfolio. The fund holds positions in companies with market capitalizations less than $1 billion, and it focuses on value stocks -- those companies with stock trading at low prices relative to their earnings. Some studies suggest that small-cap value stocks have the potential to outperform the market on a long-term basis, and given that college funding is a long-term goal, it might make sense to include this inexpensive fund.
3. Vanguard FTSE All-World ex-US ETF
This international exchange-traded fund includes companies operating outside the United States, and it can act as a sensible complement to any existing U.S.-based fund. The Vanguard FTSE All-World ex-US ETF (VEU -0.15%) is dominated by companies based in developed economies like Japan, the United Kingdom, and France -- only about a quarter of its holdings are in emerging markets. A properly sized position in this fund will achieve much, if not all, of the international diversification needed in a portfolio. Pair it in equal proportion with a low-cost U.S. ETF and you will definitely increase the potential for long-term success in your college investment fund.
4. Schwab Emerging Markets Equity ETF
The widely available and tax-efficient Schwab Emerging Markets Equity ETF (SCHE -0.32%) offers investors a low-cost option for getting exposure to emerging markets. This is another fund that you probably wouldn't want to invest your child's entire college fund in, but having a portion of your portfolio in this ETF is worth considering. It provides access to emerging economies like China, Taiwan, India, Brazil, and South Africa -- but without the concentrated risk of investing in any single country. This ETF is best used as part of a diversified portfolio that also has exposure to U.S. and international developed markets.
5. Fidelity MSCI Information Technology Index ETF
If you're bullish on tech, you can express that view through the Fidelity MSCI Information Technology Index ETF (FTEC -1.39%). The benefit of investment here is that, for an extremely low annual fee, the fund provides a basket of tech companies weighted toward top-tier names like Apple and Microsoft. While this fund probably shouldn't be a core holding, it would be a safe bet to allocate 5% to 10% of your college savings portfolio to it for a decade or two. The fund is also a prudent choice for those who are interested in tech but don't want their funds to become ensnared in the hype of day trading or the lure of headline-grabbing stocks.
Common threads
When you are making investments to pay for your kids' higher education, some of your smartest choices will be low-fee, well-diversified, and tax-efficient funds. If you stick to funds with these characteristics, you won't need to pick individual stocks.
The real beauty of this strategy is its simplicity: Once you set up an account that keeps adding to these funds in the proper proportion, your work is done. And that's for the best. You'll be adding money to these investments on a regular basis for years, but once you have a carefully considered plan for that college payment portfolio, you can (and should) largely leave it alone.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Sam Swenson, CFA, CPA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Microsoft. The Motley Fool owns shares of Vanguard S&P 500 ETF and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.
